Meme stocks are perking up again. And ETFs offer a potentially smarter way to play these highly speculative stocks, without trying to pick the winner.
Meme stocks? Didn't those fade away? After shredding tens of billions of dollars of wealth in an epic meltdown the past year, meme stocks are staging a minor comeback. The posterchild is video game retailer GameStop. Shares are up more than 100% in a few weeks.
When a stock jumps doubles that fast, it's natural to feel like you're missing out. But given their volatile track record and mostly lack of profit makes them an area to tread carefully. Enter ETFs.
"ETFs that invest in meme stocks or ones that seek to tap into retail sentiment can often be very different from broad market cap weighted index based ETFs," said Todd Rosenbluth, head of research at ETF Trends. "They can complement a portfolio if investors are willing to take on additional risk and benefit from the security level diversification."
Looking At The Return Of Memes
Meme stock investors are finally getting some respite from a rough past 12 months. Roughly a third of the 25 stocks in the Roundhill Meme ETF are up this year.
Occidental Petroleum, an energy stock that's gotten popular due to Warren Buffett's buying is on top. Shares of the energy firm nearly doubled in value this year. And Bed Bath & Beyond, another favorite meme stock during the boom early last year, is now up roughly 50% this year.
But most of the intense activity kicked off on March 14, the day GameStop started rallying. Since that time, all but one of the stocks in the Roundhill Meme ETF have risen. And some by significant amounts. GameStop is up 114% from its lows. And struggling theater chain, AMC Entertainment, is up roughly 90% in that time.
Such big gains are lifting some of the ETFs targeting the phenomenon. Shares of tiny $1.6 million-in-assets Roundhill Meme are up nearly 30% from the day GameStop started rallying. Its position in the stock is 3.6% of its portfolio, which is larger than any other ETF, says ETF.com.
Know Risks Of Meme ETFs
ETFs that own meme stocks offer diversification over trying to pick the one big winner. But they come with their own risks, too. And those loom large.
Keep in mind meme stocks can reverse just as quickly as they've rallied. Just look at the five ETFs that put the largest slices of their portfolios into GameStop stock. They're up an average of 24% from the start of the GameStop rally on March 14. That's double the 10% rise of the SPDR S&P 500 ETF Trust.
But, they're all still down this year by more than 13%. The S&P 500 is only down 3.4%.
Additionally, these ETFs are tiny. The five ETFs with the largest portions of their portfolios in GameStop shares hold a meager $218 million in assets on average. Owning such small ETFs poses a risk to investors as they're more likely to close as they don't have the critical mass to make them sustainable long-term.
That's why some investors might look at more diversified options. The Invesco S&P MidCap Momentum ETF puts 1.8% of it portfolio into GameStop. That ranks it just fifth in terms of its position in the stock among ETFs. And it's not the highest flyer. Its shares are only up 8% from the kickoff of GameStop's rally this year.
But it's also more diversified. It owns more than 77 positions, including materials companies showing price gains this year. As a result, it's only down 3.4% this year. Just know good vibes about meme stocks can vanish as fast as they arise.
"Sentiment can be short-lived and stocks can quickly move out of favor," Rosenbluth said.
Top Performing Meme Stocks In Recent Bounce
Biggest gainers in Roundhill MEME ETF from GameStop's new rally
| Name | Ticker | Stock YTD % ch. | % ch. stock since GameStop recent low* | Sector |
|---|---|---|---|---|
| GameStop | 12.4% | 113.6% | Consumer Discretionary | |
| AMC Entertainment | -5.6 | 89.4 | Communication Services | |
| Affirm Holdings | -53.6 | 77.8 | Information Technology | |
| Tilray Brands | 18.3 | 70.5 | Health Care | |
| NIO | -30 | 57.2 | Consumer Discretionary | |
| Sundial Growers | 25.4 | 54.8 | Health Care | |
| Peloton Interactive | -13.6 | 52.9 | Consumer Discretionary | |
| Block | -13.3 | 47.7 | Information Technology | |
| Rivian Automotive | -49.8 | 45.2 | Consumer Discretionary | |
| Clover Health Investments | -1.9 | 37.2 | Health Care |
